Even after "two lost decades," the Japanese economy has yet to get its bounce back.
Beset with the challenges of a rapidly aging population and declining birthrate, Japan could be said to be suffering from "Japanese disease."
Yoshiyasu Ono, a leading authority on deflation theory, says, "The problem is that (Japanese) people are worshipping money like a god."
He points out that this pathology is common in mature societies.
How to end this attachment to money? That would appear to be the key to shaking free of the recession.
Ono offered his opinions during an interview with The Asahi Shimbun.
Excerpts from the interview follow:
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Question: Even with increased public spending and major monetary easing, Japan, the United States and Europe cannot break out of recession. Why is this?
Ono: There is a fundamental flaw with our diagnosis of the symptoms and the treatment. A poor developing society with a lack of goods and inflation would end its recession in two or three years. This is because even if there is a temporary excess of goods, the preceding desire for them will remain strong and demand will recover so long as prices fall. However, in a mature society like now with an abundance of goods, people think, "I have enough stuff. I want money." That invites deflation. The correct way to view the situation now is that the United States and Europe have fallen into the same type of recession as Japan.
Mature societies risk experiencing 20 or 30-year recessions like Japan, where our economy continues to stagnate even after the "two lost decades." After a bitter experience with a bubble and its bursting thereafter, people begin to think, "The only thing I can truly rely on is money." These people retire, and then the next generation comes in with renewed confidence and starts to consume. This is because I believe it operates over a cycle of 40 years or so.
Q: Yet, postwar Japan experienced sustained, fairly rapid growth for nearly half a century.
A: Japan was a mature society before the war, but in defeat our industrial base was destroyed and we suddenly returned to being a developing society. That's why there were no worries over a lack of consumption and we could sustain high-speed growth. We became a mature society again in the 1980s, when interest shifted away from consumption and toward earning money through stocks and land. Then the focus of people's greed eventually stopped being stocks and land. Where did it turn to? Money. The Japanese economy is now in the midst of an unprecedented currency bubble.
Q: So we're in a bubble now?
A: Today's deflation-plus-recession seems to be a complete opposite of the land and stock bubble of the '80s, but it's actually the same pathology. Deflation is a decline in prices that allows you to buy more things with the same amount of money. In other words, the value of money goes up. Everyone wants money now. This "money bubble" has pushed up its value to an abnormal level.
Q: Wouldn't there be less of a need for money as a means of exchange if we were content with the supply of goods or our desire for them lessened?
A: If you have money, you can use it whenever you want and be prepared for the unexpected. But you lose that privilege as soon as you use it because its value is set according to what you buy. That's why people want to feel assured and satisfied by not using it. They want to immerse themselves in this virtual delusion. This desire is in fact on the rise.
Q: Is their purpose to hold on to the delusion?
A: Money is so convenient as a means of exchange that we could say it is humanity's greatest invention. A bill is just a piece of paper and a credit card transaction is simply the product of numerical data. Even if the money is not physically there, we can obtain great satisfaction if we believe in its value. It's like a "god," don't you think? If the real estate bubble was a religion, it would be like "reizan shinko" (a belief in sacred mountains). But money is an abstract concept with even less physical form than land. It may be like a holy scripture, as it were.
Q: If this money religion becomes fanatic, what kinds of problems will arise?
A: The enormous productive capacity we have gone through all the trouble to obtain will end up being wasted. Even though money only has meaning as a way to exchange it for goods and services, people aren't using it; they're just stockpiling it. England was like that in the 19th century. The main character of Charles Dickens' novel "A Christmas Carol," the miserly Scrooge, did nothing but count his money, never giving to those around him. He didn't spend it even on himself. That's what Japan is like now.
Q: Why can't the experts show us how to fix the cycle of deflation and recession?
A: Because traditional economics cannot explain the cause of this long-term recession. In mainstream neoclassical economics, money is only seen as "an agent for buying goods." That's why it cannot hypothesize our current situation in which the desire for money itself holds down demand for goods.
Q: What about Keynesian economics, which was born out of the Great Depression? Is it no good, either?
A: Keynes managed to formulate his theory of "liquidity preference," which refers to the desire to have money, which people can use as they please, but he stopped there. He never thought of an endlessly expanding desire for money that would suppress the desire for consumption. Thus he gave later generations his ridiculous misconception that if you just give people money, demand will recover.
Q: So where does the solution lie?
A: The problem is that even if people have money it doesn't get spent. So the government should levy a one-time tax on them and use these funds to create work that raises the quality of their lives. Such expenditures would create income for people. Even if taxpayers spend less, those who got work and incomes would increase their spending. Since the government would be making use of what was an excess labor force, it wouldn't interfere with private companies. And since the bonus would be that it would erase job insecurity and deflation, people's desire to consume would increase and the economy would recover. In short, it would expand demand and help companies.
Q: It is the same as Keynesian government policy, isn't it?
A: It's different. Keynes emphasized the monetary amount more than the kind of work. His idea was: "The government should pay people to dig holes in the ground and then fill them up." If that's the kind of work we need, then we could just give money to people without having them dig holes in the first place; in other words, it's the same thing as giving unemployment benefits to the jobless. If you just give people back the tax you went through the trouble to collect, then it won't expand demand or utilize the labor force.
Q: So you're saying that how the budget is used is important?
A: The ultimate purpose of economic policy is the maximum utilization of the labor force to make people's lives happy. If people are in excess, then you should create work that is unprofitable in the private sector and is in a poorly supplied industry so that it will create many jobs. For example, some problems our society has are a lack of care givers and daycare centers. If our response is to just give money to people, then they'll just save it instead of boosting demand in these sectors. We should do something like handing out nursing or child care tickets with expiration dates so that if you don't exchange them for goods or services within a certain period they become worthless.
Q: Isn't that the same as money?
A: It has no meaning if you just save it. An example is the pension system. The policy is to take pension premiums and taxes from the young and give it to the elderly as benefits. If the elderly don't consume and just hoard the money, then even if the young have a desire to work and consume, they'll be stifled by a heavy tax burden and eventually won't be able to get any work or income. If we used benefits in kind, then the elderly would certainly take the services while the young would have work and income to provide those services.
Q: The eco-point subsidies to bolster the economy were a kind of benefit in kind.
A: That was good as far as creating demand for green products. What if next we stimulate demand for new energies or hiking? I want lots more ideas like giving away tickets for art appreciation or using sports facilities, creating demand for more than just the necessities of clothing, food and housing. To make a mature society's economy run, you have to have advanced consumption that raises the quality of life. Individual people also need to think hard about how they can improve themselves mentally and physically to enjoy many things.
Q: As the economic brain in the administration headed by Naoto Kan, were you not able to do that?
A: Even under normal circumstances, ministries and agencies facing budget cuts were preoccupied with making sure they could keep doing the same thing they always had, so politically it was extremely difficult to rearrange the budget in a big way. That's why we needed to somehow get new revenue sources. The one-year under the Kan administration was too short a time to do this.
Q: There are still limits to revenues now.
A: Even so, if the Noda administration is able to achieve its goal of raising the consumption tax rate by 5 percent, then the government will gain 13 trillion yen in annual revenues. If they were all used for benefits in kind, they would employ 1.9 million people in, say, the service industry, thus substantially helping to resolve the unemployment problem. However, if most of the tax increase is only used to fill the hole that is the government's deficit, then it will be a true waste.
Q: Even if we provide generous benefits in kind, there are worries over the rapid decline in the working population.
A: We'll be OK. In the last quarter of a century, Japan has extended life expectancy, the average age of the first marriage and of giving birth to a first child and such by 10 percent each. In other words, a person now is more energetic and younger than someone of the same age in the past. I think we could raise the retirement age by 10 percent. Doing that would vastly increase the potential working population. However, if we do that now then seniors will stay put in their positions and even fewer young people will be hired. What we should be worried about now is the lack of employment.
I have a suggestion for all the seniors out there: how about voluntarily entering your "happy retirement life" early? I want them to think more about how they'll use their money rather than about saving it. That would be a social contribution creating employment for the young.
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Yoshiyasu Ono is an expert on deflation. He has been a fellow at Osaka University and the president of the Economic and Social Research Institute, part of the Cabinet Office, since 2010. He had served as the director of the Institute of Social and Economic Research, Osaka University. He was born in 1951. He recently published "Seijuku Shakai no Keizaigaku" (The economics of mature societies).
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